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Home / Market / Stock-market-news /  NSEL Crisis | As deadline nears, focus firmly on MCX-SX

Just about a week is left for Jignesh Shah to snap ties with MCX Stock Exchange (MCX-SX)—his third big venture in India’s exchange space—but there are no signs of any investor emerging to buy the stake his flagship Financial Technologies (India) Ltd, or FTIL, owns in the bourse that’s experiencing a crisis of credibility.

National Spot Exchange Ltd (NSEL) is no longer operational, run aground by a 5,574.35 crore fraud. Multi Commodity Exchange of India Ltd (MCX) has seen a change in ownership with Kotak Mahindra Bank Ltd buying 15% of the exchange from FTIL earlier this month.

The focus is now firmly on MCX-SX, in which FTIL and MCX each has a 5% stake; they also hold convertible warrants in the exchange that, if converted, would bring their combined holding in the exchange to around 72%.

On 19 March, the Securities and Exchange Board of India (Sebi) ordered FTIL and MCX managements to divest their holdings both in equity shares and convertible warrants in the equity bourse after finding them not “fit and proper" to control any exchange—another fallout of the fraud at NSEL that has also led to the arrest of several group executives, including Shah.

As the deadline approaches, there is no indication how FTIL and MCX will divest their holdings. A person close to MCX-SX said one of the issues that could be delaying the divestment is the valuation of the warrants. The person didn’t want to be identified. Mint couldn’t ascertain whether there are any potential buyers for the exchange.

What may be complicating the process is a recent special audit on MCX-SX conducted by chartered accountants Kalyaniwalla and Mistry at the behest of Sebi that revealed deep-rooted ties between FTIL and MCX-SX.

The audit report, a copy of which was reviewed by Mint, notes that of the total expenditure of about 650 crore by the exchange since inception, at least 400 crore had been incurred on related-party transactions. Of 43 related parties in total, most of the money went to 17 entities that included either FTIL or those controlled by FTIL.

The audit, whose findings were submitted to Sebi a few weeks ago, also found several instances of conflict of interest and lapses in corporate governance; unreasonable powers were given to MCX-SX’s former chief executive officer (CEO) Joseph Massey and FTIL under the previous board, said the report.

The audit revealed a number of instances of unfair business practices, missing documents and agreements favouring FTIL that were found to be responsible for losses at MCX-SX over the past years.

“We will not be able to comment on the audit report," said an MCX-SX spokesperson.

The exchange’s daily average turnover in currency derivatives has tumbled steeply from 12,377.7 crore in July 2013 to 3,285.23 crore this July. In the equity segment, the turnover crashed to nil from 45.28 crore in July last year.

MCX-SX is losing business fast in the currency derivatives space. While NSE’s daily average turnover in the segment fell from 17,814.76 crore in July 2013 to 11,437.42 crore this July, BSE has gained significantly in the currency derivatives space.

Since December 2013, when BSE started trading in currency derivatives, the exchange’s daily turnover in this space has shot up from 820.34 crore to 5,450.02 crore in July.

Abhishek Goenka, founder and CEO of India Forex Advisors Pvt. Ltd, cited two reasons why MCX-SX is losing business even in the currency derivatives space. He said the first issue is credibility.

“After losing money in the NSEL crisis, many investors and brokers are not confident of doing business with MCX-SX. So they are shifting to NSE and BSE. Secondly, since equities turned more attractive for investment than currencies, a lot of money in the market is flowing from currency derivatives to equity," said Goenka.

“Even after FTIL gets out and MCX-SX gets new promoters and shareholders, it will take time for the stock exchange to gain confidence of investors and brokers. The exchange will have to do extensive campaigning about its new structure and business strength to regain the investor’s confidence," Goenka added.

The newly appointed board and the top management of the exchange has started working on a revamp strategy to distance itself from Shah, FTIL and other group entities. The plan will include MCX-SX renaming itself and raising fresh capital, Mint reported earlier this week.

“They are reasonably well established in the currency futures segment but that is not good enough. Now, to meet the challenge, a whole lot of work is required. They need to first get some stability in place. There are overhangs related to associations and agreements. They need to get a strong anchor in place and funding as well. So it’s a combination of both, funding and somebody strong to come on-board to provide the funding," said Sudip Bandyopadhyay, managing director and CEO, Destimoney Securities Pvt. Ltd.

An MCX-SX spokesperson said it would focus on attracting new investors, “shifting office based on optimum needs, member engagement initiatives and focused strategies on enhancing volumes".

“We aim to break even by the first quarter of next year and our approach would be to focus on positive developments and prefer a dialogue to resolve difference and achieve the common goal," the spokesperson said.

According to two people, MCX-SX is trying to break its 99-year technology agreement with FTIL and in talks with other software vendors who can provide the technology at a lower cost.

On 23 July, The Economic Times reported the exchange had written to Sebi it plans to end business ties with FTIL. The exchange may shut some trading platforms for three months for moving to a new technology, one of the two persons said.

“The management and board of MCX-SX is in the process of reviving the exchange via a two-pronged strategy of rationalizing costs and growth of sustainable volumes. As a part of this revival process, we have initiated the dialogue with all vendors including FTIL to relook at the terms and costs of the contract," the MCX spokesperson said. “They too see merit in this exercise, which is crucial for the turnaround of the exchange and we are receiving cooperation from all the vendors as the attempt is to work collectively rather than getting into litigation."

However, breaking technology ties with FTIL may not be easy.

“There are very few specialized service providers in the exchange sphere, so it is difficult to switch platforms. There is a lot of integration involved in terms of sharing of IPs (Internet protocol). There is a lot of dependency on a given vendor. Since it is difficult to change the core platform, we therefore have limited players in this space," said Naveen Mishra, research director at technology market research firm Gartner Inc.

The special audit revealed that for the technology agreement with FTIL, the termination clause implied significant cash outflows for MCX-SX, while there was no consequence of termination of the contract on FTIL.

Such one-sided agreements may make it tough for MCX-SX to cut ties with FTIL without monetary and legal implications. A person close to the exchange said it may take up to a year for the exchange to completely dissociate itself from FTIL.

Even if it were to make a clean break from FTIL, it will have a tough task competing with its larger rivals BSE and NSE to attract business on its equity and debt trading platforms although it may continue to win some currency derivatives business.

“The challenge for MCX-SX is straight forward. They have to attract volumes in the equity segment," said Bandyopadhyay.

Since, MCX-SX launched its equity and equity derivatives segments in February 2013, attracting volumes has been a challenge for the bourse that talked about focussing on systems and processes.

Soon after the NSEL crisis emerged, brokers threatened to stop trading on all FTIL-related exchanges. MCX-SX bore the brunt as investors had stronger alternatives in NSE and BSE. The last time MCX-SX saw a trade in its equity platform was on 6 June.

anirudh.l@livemint.com

This is the final part in a series on the fallout of the fraud at NSEL.

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